Across Indonesia’s sprawling archipelago, from the markets of Surabaya to the online storefronts of Jakarta, a quiet transformation is reshaping Southeast Asia’s largest economy.
The country’s micro, small and medium-sized enterprises—MSMEs, which employ nearly all Indonesian workers—are increasingly abandoning production and reinventing themselves as sellers of Chinese goods.
This is not simply globalization at work. It is a structural shift driven overwhelmingly by China’s vast manufacturing machine and Indonesia’s inability to compete with it.
Indonesia’s minister for MSMEs, Maman Abdurrahman, recently sounded the alarm. More and more Indonesian entrepreneurs, he noted, have stopped producing altogether, instead importing low-cost products from factories in China and selling them at home. For a country that sees MSMEs as the backbone of its industrial future, this trend is a warning sign.
These firms account for roughly 90-95% of all employment. They anchor regional economies, absorb workers with limited formal education and provide the foundation for Indonesia’s ambitions to move up the value chain. When MSMEs stop making things, Indonesia loses not only jobs but also the potential to develop its own industrial ecosystem.
China, of course, has become the world’s workshop for a reason. Its factories operate at a scale that dwarfs those of most developing countries. Decades of state-directed industrial policy, aggressive investment in infrastructure and tightly coordinated supply chains have created an environment where a small factory in Guangdong or Zhejiang can produce consumer goods faster and cheaper than nearly anywhere else.
For Indonesian entrepreneurs facing rising domestic production costs, China is the convenient—and often irresistible—supplier.
But the imbalance goes beyond comparative advantage. Chinese goods pour into Indonesia with astonishing ease, often without proper labelling or certification. Some arrive unlabelled and get rebranded once they reach Indonesian wholesalers.
Domestic producers, however, must comply with a heavy regulatory burden, ranging from halal certification to national quality standards to food and drug approvals. These rules serve public interests but unintentionally penalize local producers while foreign goods evade scrutiny.
The result is predictable: Indonesian MSMEs do the math. Manufacturing is expensive, slow, and regulatory-heavy. Importing from China is cheap, fast, and relatively frictionless. Under such conditions, what rational business owner wouldn’t abandon production?
Yet the consequences for Indonesia are severe. The textile industry—once a pillar of Indonesian manufacturing—is already buckling under the pressure. Cheap Chinese garments and fabrics now saturate the market, often sold at prices Indonesian producers cannot match even before accounting for labor or electricity.
Factories are laying off workers, while some are shutting down entirely. China’s efficiency is not just undercutting Indonesian manufacturers; it is eroding the very sectors the country needs for its economic ascent.
The creative cost is equally alarming. Indonesia is known for its craftsmanship in batik, weaving, woodworking and traditional textiles. When MSMEs become resellers of Chinese mass-produced products, the space for creativity and innovation shrinks. What has long made Indonesian small businesses unique risks being replaced by generic imports circulating through Chinese e-commerce platforms.
For Beijing, this trend is hardly unwelcome. Indonesia is a market of 270 million people—larger than Russia, larger than Brazil and almost as large as the United States. As Chinese firms face slowing growth and rising competition abroad, Southeast Asia has become an ever more important destination for their exports.
An Indonesia that relies heavily on Chinese goods is one that strengthens China’s economic reach, deepens its regional influence and cements its role as Asia’s dominant supplier. But this is not a story of Chinese aggression. It is a story of Indonesian vulnerability. The core problem lies in Indonesia’s waning domestic competitiveness.
MSMEs operate with outdated equipment, limited access to financing, fragmented supply chains and complicated regulatory hurdles. China’s industrial strength exposes Indonesia’s industrial weaknesses—and MSMEs, squeezed between the two, are choosing personal survival over national strategy.
Indonesia must resist the temptation to treat this as a mere import issue. Closing borders or imposing blunt protectionist measures will not rebuild its industrial base. Nor will blaming China change the reality of its enormous manufacturing advantage.
What Indonesia needs instead is a long-term strategy to upgrade domestic production. That should include simplifying regulations that needlessly burden small producers, investing in modern equipment, strengthening supply chains and helping MSMEs scale up. Only when Indonesian producers can compete on price, quality and consistency will entrepreneurs choose to manufacture rather than import.
Indonesia stands at a crossroads. It can become a vast consumer market for Chinese goods, with its MSMEs relegated to retail and distribution. Or it can rebuild a domestic manufacturing base capable of standing alongside China as a partner, competitor and equal.
The choice will determine whether Southeast Asia’s largest nation becomes an engine of production or merely another endpoint in China’s export pipeline.
Muhammad Zulfikar Rakhmat is director of the China-Indonesia Desk at the Jakarta-based Center of Economic and Law Studies (CELIOS) independent research institute. Yeta Purnama is a researcher at CELIOS.
